How to be Financially Prepared When Purchasing Your First Home

Getting ready to purchase your first house can seem like a daunting task. You need to take into account credit scores, mortgages, and down payments. Below is a simple guide that will ensure you are ready to make one of the most significant purchases in your life.

Determine How Much You Can Afford

The first thing to do before adding a house to your investments portfolio is making sure that you are ready. In general, you should expect your home to financially pay you off after you’ve lived in it for at least five years. On the other hand, there’s nothing wrong with renting now, depending on your financial position.

While it’s not always viable living in an expensive real estate area, you should always strive to keep your housing payments at below 30 percent of your monthly gross income. Spending more than that may make you “house poor” – a situation where you’re living in a beautiful home but can barely keep up with monthly expenses.

Preparing Your Finances for the Mortgage Process

The real frustration is finding your dream house, and discovering you are not qualified financially to purchase it. Before buying your first home, ensure that you are financially ready by having good credit, a verifiable source of income, and cash to close the deal.

For starters, getting a mortgage requires you to have an ok credit score. It’s always a good idea to check for errors in your credit reports regularly. Go a step further and invest a couple of months in a daily credit score monitoring service.

Apart from ensuring your credit score is in order, you need to ensure that you have cash ready. Of course, there’s the down payment, which is typically about 3.5 to 20 percent of the home’s purchase price. If you need help, services like down payment assistance programs are available to ensure you have the money ready whenever you need to buy a house.

As you get closer to placing an offer on a home, gather documents you will need to verify finances during the mortgage application process. These include bank statements, W-2’s, paystubs, and if you are on self-employment or freelance pay, copies of your latest two tax returns.

If you intend on putting down anything less than 20 percent, a lender will presumably charge you a premium called Private Mortgage Insurance (PMI). The PMI protects your lender in case you default on the loan, and your home’s value plummets significantly.

Shop for a Mortgage

Many times, prospective homeowners delay looking for a mortgage product until the last minute, and they lose their dream houses to other bidders due to lack of financing. Fortunately, serious buyers can get free and non-binding mortgage pre-approval.

Comparing different mortgage products is confusing. You need to consider adjustable and fixed rates, which are often priced differently. You also have the option of taking on a 30-year mortgage or one as short as five years – expect higher interest rates on longer-term loans.

Fixed-rate mortgages are the best for many homebuyers, and within them, the 30-year fixed-rate home loan is by far the most common type of mortgages. However, it doesn’t hurt to investigate further how mortgage interest rates work, affect you, and the different kinds available. You might also consider running different scenarios through online mortgage calculators to get a feel for different rates and terms and how they correlate with monthly payments.

Summary

Purchasing your first home can be one of the most exciting, and stressful, moments in your life. However, once you have the right information, you can shop for a home, apply for a mortgage and close a deal with confidence.

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